We bring you a summary of a recent judgment of the Court of Justice of the European Union concerning the application of the dividend exemption and its possible restriction in cases of abuse. The judgment in case C-228/24 (Nordcurrent) provides clearer rules for assessing so-called “non-genuine arrangements” and will have a significant impact on the tax planning of multinational groups.

The case concerned the Lithuanian company Nordcurrent Group UAB, which in 2009 established a subsidiary in the United Kingdom to distribute video games. After some time, the main functions were transferred back to Lithuania and the subsidiary was liquidated. In the meantime, Nordcurrent claimed exemption on profit distributions paid by the subsidiary. The Lithuanian tax authority refused the exemption, arguing that the structure was artificial and that its main purpose was to obtain a tax advantage. At the time of the refusal, the company had no human resources apart from one director, who simultaneously managed seven other companies. The company also had no business premises of its own (it was registered at a virtual address) and owned no assets.

The Court of Justice emphasized that the abuse prohibition under the Parent-Subsidiary Directive does not apply only to empty companies without real activities. Abuse may also be established where a company carries out some economic activity, but the circumstances indicate that one of its main purposes is to obtain a tax advantage. The assessment must be comprehensive and cover not only the moment of the dividend distribution, but also the broader context – the reasons for establishing the company, its historical development, and any subsequent transfer of activities.

At the same time, the Court made clear that simply labeling a company as an artificial arrangement is not sufficient. Two elements must be present in order to deny the exemption: first, a lack of genuine economic justification, and second, the existence of a tax advantage that undermines the purpose of the Directive. The overall tax effect in both states must also be taken into account. The fact that the subsidiary was subject to a higher corporate tax rate than the parent company does not automatically rule out abuse. The decisive factor is whether the structure was created or maintained primarily for the purpose of obtaining a tax advantage contrary to the Directive’s objective.

The judgment in case C-228/24 thus confirms that Member States may deny the dividend exemption in abusive situations, but they must always demonstrate the existence of both conditions – the absence of genuine business reasons and the presence of an unwarranted tax advantage.

What does it mean in practice?

Businesses should pay increased attention to documenting the economic reasons for setting up and operating foreign subsidiaries. It is not enough to have a company “on paper” – what matters is demonstrable business substance. It is also advisable to regularly assess the tax implications of structures in a broader context and be prepared to prove that the primary purpose of the affiliated company is not to obtain a tax advantage

How can we help you?

We monitor the latest case law of the Court of Justice of the EU and its impact on Slovak entrepreneurs. We will help you assess whether your foreign structures meet the requirements for economic substance and what measures to implement to ensure that the tax exemption will withstand any possible audit.

If you would like to receive further information, our tax experts will be happy to provide you with advice in this area

Andrej Dopjera

Senior Tax Consultant | Accace Slovakia

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